Portfolio

Segro rental collection remains strong in fourth quarter

By Josh White

Date: Wednesday 21 Oct 2020

Segro rental collection remains strong in fourth quarter

(Sharecast News) - Segro reported "strong" rent collection in its fourth quarter on Wednesday, with UK collection at 85% of total rent billed, which was higher than at the equivalent date in the second and third quarters.
The FTSE 100 commercial landlord said a further 13% had been deferred by agreement with tenants, most of which was now payable monthly, meaning that the majority of that would have been received by the end of the year.

Rents in its continental Europe portfolio were typically paid monthly, so the board said it was still early in the fourth quarter collection cycle.

Current indications were that continental Europe was also tracking ahead of previous quarters, with 98% of rents collected for both the second and third quarters.

Segro said it had now collected 96% and 95% of the second and third quarter rents, respectively, across the group, in line with the payment plans agreed with its tenants.

Of the remaining £9m, the board said it expected to collect £6m by the end of the year, and the rest in 2021.

On the leasing front, Segro said it had signed contracts worth £15.8m of new headline rent for the third quarter, up from £15.3m year-on-year, taking the total for the nine months to 30 September to £49.6m, up from £48.6m at the same time in 2019.

Rent roll growth from existing space, net of take-backs, was £5.6m, compared to £2.1m a year earlier, taking the nine-month figure to £7.9m, down from £10.6m.

The board said the company had continued to capture reversionary potential from its portfolio, with new headline rents on review and renewal 10.3% higher than previous passing rent in the nine months to 30 September, compared to 10.4% at the end of June.

That excluded the impact of securing the final re-gear of the peppercorn leases in the Heathrow portfolio which, when included, increased the uplift to 22.3%.

So far in 2020, Segro said it had completed 695,800 square metres of new developments, compared to 765,900 square metres at the same time last year, capable of generating £38m of headline rent, up from £33.7m year-on-year, of which 80% had been leased.

Developments capable of generating £11m of headline rent were expected to complete in the fourth quarter, £8m of which had been secured.

The vacancy rate was stable at 5.2 per cent, and customer retention remained "high" at 88%, which Segro said reflected its prime locations and focus on customer service.

Segro signed £5.8m of new, unconditional pre-let agreements and lettings of speculative developments prior to completion during the quarter, compared to £7.7m a year earlier, taking the nine-month figure to £24.6m, up from £22.2m.

That included pre-lets in Italy and Spain to a global online retailer, as well as its largest ever pre-let in Germany to a new customer in the e-commerce homewares sector.

At 30 September, 645,800 square metres of space was under construction, equating to potential future headline rent of £38m, compared to 809,500 square metres and £45m a year earlier, of which 75% had been secured, down from 85% at the end of June.

Once complete and fully let, the pipeline was expected to generate a yield on total development cost of approximately 6.5%.

Further 'near-term' pre let projects were expected to begin in the coming months, with potential capital expenditure of £300m and associated rent of £32m.

Segro said it remained on course to invest more than £800m in its development pipeline, including land, infrastructure and construction, in 2020 as a whole.

Since the period ended, it acquired Electra Park, which it described as a prime urban warehouse park in a central London location two miles north of Canary Wharf, for £133m.

During the third quarter, it invested £14 million in standing asset acquisitions, including an urban warehouse in north London and a big box warehouse close to Barcelona.

It also invested £29m in its land bank, the majority of which was spent on land acquisitions in Spain as part of its strategy to achieve scale in that market.

All of the sites acquired were in close vicinity to the attractive logistics markets of Barcelona and Madrid.

Disposals during the quarter were modest, as expected, totaling £13m and including the sale of a big box warehouse in Italy to its SELP joint venture, and a plot of land in Germany.

So far in 2020, Segro said it had disposed of £73m of assets and land, down from £122m year-on-year.

On the financial front, the company said it achieved further debt refinancing, with the repayment of £79m 6.75% bonds due 2021 and £39m 7% bonds due 2022, and the issue of €450m of US private placement notes with a blended coupon of 1.6% and average maturity of 17 years agreed in July, to be funded in the fourth quarter.

Net debt, including its share of debt in joint ventures, as at 30 September totalled £2.7bn, up from £2.5bn at the end of June, equating to a pro forma look-through loan-to-value ratio of 24%, up from 22%.

Around 7% of the interim dividend was paid as scrip, resulting in the issue of 0.6 million new shares during the quarter.

Earnings per share for 2020 were expected to be based on an average of about 1.15 billion shares.

"Segro has continued to perform well in the third quarter with the acceleration of structural trends fuelling further demand for our asset class from both customers and investors, outweighing any negative economic impacts from the pandemic," said chief executive officer David Sleath.

"This has led to another period of strong leasing activity, helping us grow rental income on the existing portfolio through capturing reversion as well as continuing to secure further pre-let developments.

"Our active, substantially de-risked, development programme comprises over 1 million sq m of new space under construction or in advanced discussions."

Sleath said rental collection had improved in the quarter, adding that the board remained confident in its outlook despite the macroeconomic uncertainties caused, in part, by Covid-19.

"We expect to continue to drive sustainable growth in both earnings and dividends from the combination of new rental income from the development programme, compounded with the benefits from active asset management of our existing prime portfolio."

Segro said it would release its 2020 full-year results on 19 February.

At 0828 BST, shares in Segro were down 0.75% at 930.8p.

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